Challenges Of Access To Finance For MSMEs In Somalia

Access to finance for MSMEs in Somalia has become an issue since the state lacked an effective government to cater for the financial services. Therefore, the willingness to offer such exceptional services became paramount, leading to the emergence of private financial institutions in Somalia.

A decade ago, a group of Somali businesspeople started financial institutions in Somalia to provide commercial financial services to the Somali people for the first time after the collapse of Somalia’s central government in 1991, the experience of serving commercial loans was new and challenging. Investors had faced long heads with conservative communities with little understanding of Shari’s models regarding the financial sectors. Assuming the deals conflict with sharia’s principles, the community challenged the initiative with rumours that Riba ( interest) could infiltrate the financial transaction, which enforced newly established banks to build a Shari’a board to advise the banks and enlighten the community regarding banks’ services in shari’a perspectives.

Salam Somalia bank was the first Islamic bank to operate in Somalia in late 2009 and was followed by Dahabshiil Bank International (DBI) in late 2011. I was fortunate to be among the first bank staff in my region (Puntland) to experience banking services in such a setting.


Although Financial institutions in Somalia provides lending to their client, recently interviewed clients from two Financial institutions confirmed that loans are not sufficient to scale-up Somali MSMEs. Technical assistance and capacity building are required for both financial institutions and end clients (browsers) to sustain the loaned businesses. Financial institutions (FIs) should offer their clients modern coaching services covering self-confidence, business leadership, creativity, risk propensity, motivation, resilience, and self-efficiencies. This kind of support will most probably support the business owner to sustain and run a lucrative business long-term. 

World Bank study “Profiting from Parity” suggest Personal Initiative (PI) Training as a type of psychological entrepreneurship training that teaches entrepreneurs a proactive, self-starting approach. The study suggests not putting more effort into traditional pieces of training. 

 “Personal Initiative (PI) focuses on future-oriented, persistent behaviour and developing “an entrepreneurial mindset.” Participants learn to look for ways to differentiate themselves from other businesses, as well as to anticipate problems and overcome setbacks. This fosters better planning skills for opportunities and better long-term preparation,” world bank Report quote.

Financial Institutions in Somalia familiarized the use of Murabaha (Cost-plus Mark-up) as a shari’a compliance model of financing. This type of financing gives a higher chance of less risk to the FIs; if the business loses, the FIs should receive their payment on time from the borrower or the guarantor without providing injection support to the failed project; many Muslim countries in the world prohibited using Murabaha. Some of them allow commercial banks not to deal with Murabaha for more than 20 per cent of their annual transactions; some Islamic scholars suggested avoiding Murabaha since it’s a load onto borrowers and has zero risk for FIs.

Under Murabaha, Somali FIs don’t offer clients diverse products, which makes all FIs in the country similar in nature and identical in deals. Lack of innovation of new products that fascinate more clients can be included a) Lack of research and development department in the financial institution in Somalia. FIs focus only on loan disbursements and repayments and not on innovation and sustainability of projects they finance; that is why it is not easy for Somali Women and Youth to get access to the services provided by FIs in Somalia since businesses led by youth and women are fragile and less productive compared to male-owned businesses. FIs don’t like innovating new products; instead, most banks appear to follow customer demand and respond to applications from clients. b) FIs presume that financing productive sectors are risky, and repayments cannot be collected; thus, MSMEs in the retail sector and those who demand consumable goods are the major beneficiaries of the services offered by FIs in Somalia. 

Do MSMEs only need financing for business development? 

Most probably, borrowers not only need loaning (Murabaha) but also demand Capital financing rather than Murabaha financing, which does not allow cash transactions: it is not permitted in Shari’a principles that FIs to offer their client cash on hand under Murabaha, which makes it difficult on MSMEs to acquire working capital (most clients use the TAWRUQ method, client’s resale the products offered by the bank to obtain cash this method is very costly to the clients). FIs in Somalia should come up with innovative initiatives to allow the business owner to obtain capital 

support that does not contrast with their shari’a-compliant model. Business development services Mentorship, capacity building, and financial literacy are very critical for the long-term sustainability of the end clients’ businesses; most Financial Institutions focus on loan repayments and not on borrower business sustainability if the FIs set their mind on the goal considering the borrower business longevity the repayment challenges would be a lesser extent. Longer repayment duration: FIs in Somalia needs to relook the loan tenure they offer to their clients.  The average loan repayment period that FIs provide is very little compared to the financial institutions in the neighbouring countries. Better repayment holidays before repayment starts, interviewed borrowers indicated that one month is not enough to start the repayment immediately after loaning.  Expanding FIs services FIs in Somalia are urban-centred institutions with little access to rural and remote area communities, which makes a higher portion of the country’s population undeserved. Considering the high cost of opening new branches and accessibility challenges, FIs can familiarize themselves with the Wakalah system (banking agency) model to reach rural and remote village communities. 


Many MSMEs survive due to investments made by the financial institutions in Somalia; although it is easy for small businesses to fail if not provided business development services to the owners, Qadan Abdi is one of the MicroDahab MFI-supported female business owners in Berbera, Somaliland; she is sharing her experience with commercial loan impact.

Qadan Abdi vegetable vendor in Berbera, Photo credit AECF team

She is a young female entrepreneur of a vegetable vendor in Berbera Somaliland. Qadan caters for her Three children plus three family members depending on her small business. Qadan needed to expand her business and reached out to Microdahab MFI Berbera office to obtain a US$1,000 concessional loan; after the MFI provided the loan, she expanded the business and employed one young female full-time staff to support her business, and due to the support, her family monthly income increased from US$100 to US$300. the MFI has financed Qadan with the support from the Africa Enterprise Challenge Fund (The AECF) EU-funded program of Finance for Inclusive Growth-Somalia.


  1. Mark-up rate: the profit rate that FIs change on the loans they provide to MSMEs in Somalia is relatively high; interviewed clients responded that bank markup rate is heavy on them, and lack of alternative endures their stay with the local loans providers. 
  2. FIs focus on repayment and not impacts; this can participate small-scale businesses to fail if not provided with technical support by banks or business development service providers.
  3. FI’s conditions to offer loans for MSMs, such as guarantor & collateral is a significant impediment to MSMEs’ access to loans, especially for Women and Youth owned enterprises.
  4. Lack of products targeting specific groups: using Murabaha as a mode of financing and lack of innovative products segmented to a particular group of borrowers makes FIs sluggish and doesn’t attract new clients since similarity dominates the market.
  5. Banks consider productive sectors risky due to risks associated with the sector; this understanding is unfortunate that Agribusiness, fishing, and livestock products are excluded from the list of viable businesses that banks invest in many financial sector experts expected local FIs would invest in the productive sectors to participate reducing food insecurity in the country of being in civil war and destruction for more than three decades.
  6. Banks are urban-centred and excluded from their services in rural and remote villages.
  7. To avoid risks, most banks prefer to invest in already existing clients with excellent repayment history; thus, reaching more businesses, especially those owned by Women and Youth in rural and remote villages, can be difficult, and banks need to pay more significant efforts to expand their portfolio outreach to unbanked clients. 
  8. The application process most probably takes weeks if not months, this is a major problem that MSMEs face when they apply instantaneous investment from local financial institutions to handle emergency business deals, the lack of bank staff capacity to screen, and expedite the process can attribute the existence of this challenge.


Access to finance for MSMEs in Somalia is complicated by the weak government institutions working in fragile and insecure settings where the law enforcement institutions are not entirely in operation is a massive impediment to the banks to lend to borrowers without fear of their investment returns. Lack of proper infrastructure and access to the market also is another challenge. FIs face challenges in financing productive sectors that include poor regulation and inadequate infrastructure, and business persistence is a challenge in many regions, especially south and central, driving up the cost of doing business in productive sectors and increasing risks. Researchers with new innovative ideas also need to focus on this area to overcome such challenges.  More research has to be done to improve state financial institutions before foreign FIs take the market, which gives tough competition with such a capital circulation environment. Central Bank of Somalia recently granted licenses to two froing banks from Egypt and Turkey to operate in Somalia, which gives tough survival moments to local financial institutions if the afro- mentioned challenges aren’t solved with amicable resolution mechanisms.

About the Author 

Abshir Musse is passionate about financial development and an MSMEs expert who has more than ten years of banking and development programs experience in Somalia, he is currently a program manager at AECF in Somalia while he is managing Finance for the Inclusive growth program. Before he joined AECF he worked with the USAID-Geel project, WB SEAP Project as well as Somali privet banks and Microfinance institutions.

Abshir holds a bachelor’s degree in Economics from Mogadishu University-Somalia and a master’s degree in Economic planning and Policy formulation from Kampala University-Uganda.